Change of criterion on the VAT reverse charge rule in sales of real estate where part of the price

On 20 September 2022 the Spanish Central Economic-Administrative Court has published a resolution setting the following new criterion on the reversal of the VAT taxable person:

In sales of real estate in which part of the price is used to cancel the charges levied on such properties, the reverse charge mechanism shall not apply, so the seller will be considered the VAT taxable person and, as such, it will have to charge output VAT to the purchaser, file a VAT return and pay the corresponding VAT to the Spanish Tax Authorities. In principle, this concerns mortgages, but the criterion should also apply to other charges, such as urban development charges.

This resolution does not affect other cases of transfers of real properties in which the reverse charge mechanism will still be applicable, such as: (i) transfers carried out as a consequence of an insolvency proceeding; (ii) transfers in which the VAT exemption has been waived; or (iii) transfers carried out through the enforcement of a security (mortgage auctions), through deed in lieu or assignment of assets in payment of assuming a debt.

This resolution is important for two reasons: (i) the new criterion will be binding to the Spanish Tax Administration (both the Tax Inspectorate and the General Directorate of Taxes); and (ii) it is contrary to the binding and reiterated criterion of the Spanish General Directorate of Taxes on this matter, which has been habitually followed so far in the Spanish real estate market.

Temporary effects

The temporal effects of the change of criterion is a controversial issue.

We consider that such a change should not have retroactive effects, as there are arguments to defend that it is harmful to the taxpayer due to the clear financial detriment it generates. Therefore, the new criterion should only be applied from the date it took place and without affecting transfers prior to the date of the abovementioned resolution (i.e. 20 September 2022), in application of the principle of legitimate expectations. In addition, we understand that any tax reassessment of past transfers should not entail an obligation to pay VAT, on the basis of the tax payer's right to a full tax reassessment.

Notwithstanding the above, this issue should be analysed on a case-by-case basis, in particular in those cases where the transfer is pending but there have been advance payments in the past.

We hope this information is of interest. Should you need any further clarification or additional information, please do not hesitate to contact us.